Veles Capital - RusHydro: IFRS 2018 FY results - Mar 19, 2019

RusHydro

IFRS 2018 FY results

March 19, 2019

RusHydro presented 2018FY report and a conference call. NEUTRAL.

Report appeared to outperform our targets lightly:

EBITDA grew 7.4% YoY and the net profit was up by 41.8% YoY.

The item “selling power energy” provided for the principal input to given.

Unfortunately, management presented no details in course of the conference call on any of the following issues:

- time constraints of adopting dividend policy, introducing a “lower threshold” of dividends above the previous three years average;

- possible level of output for 2019;

- forecasts on Boguchansk Energy and Metallurgical Association project;

- matters of conducted write offs on core assets for 2018;

- exact dates of the upcoming additional emission for overhead power lines Pevek–Bilibino.

Key takeaways:

- the already devaluated stations are likely not to be devaluated again in future (not considerably at least);

- serious underperformance of profitability of the retail segment was due to a share of consumers leaving for the wholesale market for electricity and power;

- coal prices have already added 7-10% in 2019 YTD.

Subsequent to the results, we keep the cautious outlook over the prospects of the stock of RusHydro (our target price is RUB 0.51) as 2019 promises to be challenging for the company: it is to face an all-time high CapEx, and an additional emission at loss-making and not profile project on construction of overhead power lines Pevek–Bilibino for RUB 13 bn.

Worsening profitability of the distribution business was a negative surprise to us. Moreover, from the looks of it, we might observe rise of CapEx of digitalization and installation of “smart” energy meters in the distribution business.

As for some mild positive, we indicate that the forward, signed with VTB bank should not make any negative effect on the net profit of the company in the future as the potential of the further decline of the stock is restrained already we believe. Large write offs and devaluation of principal assets that we are to observe for 2019 FY are to be the final ones in the prospect and are to decline remarkably later on.

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